Japan legislation guide
By Hideaki Roy Umetsu
Mori Hamada & Matsumoto
Tel: +81 3 6212 8347 Fax: +81 3 6212 8247 Website: www.mhmjapan.com
Despite the extensive destruction and damage caused by the earthquake in March 2011, the Japanese legal and M&A markets are showing strong signs of recovery. In particular, an upward trend in cross border M&A transactions is noticeable because of the strong desire of Japanese companies to expand abroad, particularly at a time of a strong yen and abundant cash reserves. This article highlights the key developments in the Japanese M&A legal environment.
Special measures for exchange tender offers and squeeze-out procedures
Amendments to the Law on Special Measures for Industrial Revitalization and Innovation took effect on July 1 2011 to permit an exchange tender offer as an M&A structure and to provide for special measures to expedite squeeze-out procedures.
Exchange tender offers
Under the Companies Act, the exchange tender offer is considered an issuance of new shares by an acquiring company in consideration for a target company’s shares, and is subject to certain requirements. These include (a) shareholders’ approval if the issuance is considered a ‘discount issuance’ in cases where the acquiring company makes a tender offer in excess of a certain premium threshold, and (b) filing a petition in court for the appointment of an inspector to investigate the value of a target company’s shares to be paid for the newly issued shares of an acquiring company. These procedures, particularly the court valuation, take time and are unable to cope with the relatively short period of tender offers. The amended law provided for exemptions from such cumbersome regulations subject to certain governmental approvals.
Squeeze-out procedures
If minority shareholders remain after the tender offer, Japanese purchasers commonly employ a squeeze-out procedure to acquire 100% of the shares of a target company. Mainly for tax reasons, such a squeeze-out process is usually achieved through a complicated and time-consuming structure, primarily by using a special class of shares that require shareholders’ approval and a court order. Completing the whole procedure usually took between four and six months after completion of the tender offer. The amended law introduced special measures to expedite this procedure, subject to certain governmental approvals, if an acquiring company holds more than 90% of the voting rights after a tender offer. With these measures, the squeeze-out procedure is expected to be shortened to one to three months.
Increasing precedents regarding fairness of price
In recent years, an increasing number of minority shareholders to be squeezed out have begun questioning the fairness of the squeeze-out price. The Companies Act allows shareholders who oppose the squeeze-out to request the courts to determine the ‘fair price’ for being squeezed out. However, it does not provide the parameters in determining the fairness of the share price and the courts are free to make that determination at their own discretion, which posed a major risk when conducting a squeeze-out process. In recent court challenges, although the courts considered various factors in deciding the fair price, they have stressed the importance of the market price among other pricing measures. It is still difficult to establish exactly what factors will be taken into account at this point due to lack of cases, but these recent cases have become warnings for acquiring companies to carefully deliberate the fairness of their tender offer price. The increasing number of potential court challenges will certainly provide practitioners with more guidance on the matter in the near future.
Possible amendment to the Companies Act
Although the Companies Act has been completely amended recently, the rapidly changing environment faced by Japanese companies has already highlighted its shortcomings. Accordingly, the Ministry of Justice began discussing possible amendments to the act. Among the issues that the Ministry is discussing are: a creditor protection rule in case of demergers; the capacity of shareholders who may challenge the fairness of share prices in M&As; minority protection rules in M&A transactions (including introducing sell-out rights for minority shareholders); and new injunctive remedies for M&A transactions. The discussions started in April 2010 and, at the time of writing, are still ongoing. It is hard to predict what kinds of amendments will ultimately be realised due to the diverse opinions in the discussion. Even so, potential developments in the discussion are certainly worth watching.